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Originally published Friday, April 20, 2012 at 3:00 PM

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We need a new 'norm' for executive pay

A cornerstone of capitalism is that by richly rewarding successful managers who build up businesses, we all prosper. That makes sense, writes Froma Harrop, but for one thing: Corporate America has learned to fix the game.

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Lavishly paid executives have a new 1 percent number to ponder. It's not about their perch on the top branch of U.S. incomes. It's the lousy 1 percent rise in Citibank's quarterly revenues, which helped prompt the bank's stockholders to reject CEO Vikram Pandit's $15 million pay package. That they were earning a meager 1-cent-a-share quarterly dividend did not improve their mood.

A cornerstone of capitalism is that by richly rewarding successful managers who build up businesses, we all prosper. That makes sense but for one thing: Corporate America has learned to fix the game so that their honchos walk away with fortunes, whether their companies do well or not.

Defenders of the system insist that executive pay is no business of the government. The company owners — the stockholders — are the ones to set pay levels. A fair argument, except that CEOs have filled their boards with other executives who want to run up pay levels for people like themselves.

To partly address the disconnect between pay and performance, the Dodd-Frank reforms include an item called "say on pay." It gives shareholders the right to vote for or against executive compensation. It was such a vote that put Pandit's pay under 200 tanning lamps.

"Say on pay" is hardly a revolution in either stockholder rights or curbing extravagant executive pay. The vote is for show, and the board may ignore it. But even this meek exercise in executive scrutiny is too much for some. When the Securities and Exchange Commission addressed the "say on pay" provision, its two Republican members opposed it. They said that it would pile added cost on "small business" (you know, all those mom and pop gift shops listed on the stock exchange).

Although the "say on pay" vote has no teeth, it is not without consequence. The attention drawn to excessive pay levels is not good for the companies involved. And such votes may push some return to a socio-economic "norm" that had been all but discarded starting in the 1980s.

As MIT economist Frank Levy told me, by the end of World War II, "business had a bad reputation and kept its head down." This stance reflected lingering public anger over the Great Depression and profiteering during the war.

To get things moving, President Truman held a conference in November 1945. Truman envisioned a "foundation for industrial peace and progress" that enlisted three parties: business, labor and government. It established an expectation that postwar prosperity would be shared with workers and that their unions would be respected. Listen to Eric Johnston, president of the U.S. Chamber of Commerce, speaking at the 1945 conference:

"Labor unions are woven into our economic pattern of American life, and collective bargaining is a part of the democratic process. I say recognize this fact not only with our lips but with our hearts."

On to the chamber's view on organized labor circa 2012: A major mission, according to the website, is to "restrain abusive union pension fund activism and block labor's anti-competitive agenda."

It happens that these pension funds own huge blocks of stock. For example, CalPERS, the California state pension fund, holds almost 10 million Citigroup shares. CalPERS can be as active as it wants to be.

Revealing was a CalPERS director's comment on pay and performance at Citi. Anne Simpson said: "If you reward them for focusing on high-risk, short-term profits, that's what you get, and that's how the financial crisis caught fire."

While Citigroup can ignore the vote against the pay package, the bank says it won't. This may be overly optimistic, but could a new norm be rising from the rubble of our recent economic crisis?

Froma Harrop's column appears regularly on editorial pages of The Times. Email: fharrop@projo.com

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